Forex Trend Following Strategy to Swing Trade Like a Pro

Forex Trend Following Strategy to Swing Trade Like a Pro

trend following strategy

I would like to invite you on a special journey in the chart and in-between candlesticks. I will do my best to make the ride enjoyable. I will discuss a discretionary trend following strategy that makes use of swing trading as well.

But wait, before you jump into the ride, let me tell you that you need to be familiar with key technical analysis topics. Such as Forex reversal candle patterns and other topics.

I included links to the explanation of some of the topics within the content of this post. However, as you read, If you encounter a topic that you need an explanation for you can always refer to the Forex technical analysis tutorial.

Before I start explaining the trend-following strategy, let me explain what is swing trading and what is trend-following.

What is Trend Following Strategy?

Trend following in Forex or any other market is a type of trading where traders aim to catch the majority of a new trend. From near start to near finish. They aim to enter at the lowest price possible in an uptrend and hold onto their trading position until sufficient evidence suggests that the trend may have reversed. Trend followers do not care about trading the pullbacks.

forex trend following strategy - do work
Forex trend following strategy – does work

Most Forex trend-following strategies fail in a sideways high volatility market. If the same method in the above chart was applied to the market conditions in the chart below, it would have resulted in numerous false signals and whipsaws.

forex trend following strategy- doesn't work
Forex trend following strategy -does NOT work

Trend Following Strategy Advantages

  • Going with the price move.
  • If the trade signal was successful, traders would catch a major move.
  • Excellent risk-to-reward ratio.
  • Less time monitoring the market.
  • Less number of trades equals less transaction cost.

Trend Following Strategy Disadvantages

  • Trend following strategies work only if the market is moving in a lengthy directional trend. And they usually lose money if the trend length is short.
  • High volatility and fluctuations will result in whipsaws, false entries, and exits.
  • Stop loss is usually wide in a trend-following trade. As the trader aims to account for unexpected pullbacks or to avoid getting stopped before the actual trend starts.

What is Swing Trading

Swing trading is a type of trading where traders attempt to capture parts of the price up and down moves (swings) in the market.

Swing traders do not care about the underlying trend, as they would trade in the direction of the trend, or against it.

Typically, a swing trader would buy near support and sell near resistance.

Unlike trend followers, swing traders attempt to capture parts of the trend and trade sideways market. Therefore swing trades have a shorter time horizon.

Although that provides more trades, swing traders are likely to miss substantial price moves because of premature exits. Also, more trades means more transaction cost.

Another drawback with swing trading is that traders will have to monitor and research the markets more.

But the primary drawback with swing trading is trading against the main underlying trend. Which is not recommended in most cases(Unless you have your own proprietary trading system, that you thoroughly tested and had a consistent success rate).

Swing Trading Advantages

  • Capture smaller trends.
  • Can take advantage of high volatility sideways trends.
  • Smaller stop loss.

Swing Trading Disadvantages

  • Trading against the trend.
  • Not that great risk-to-reward ratio
  • More trades means higher transaction cost.
  • More time monitoring the market

Combining Trend-Following and Swing Trading in Forex

Using a mix of trend following and swing trading styles would provide the following advantages from both styles:

  • Trading only in the direction of the trend.
  • Staying in the trade a bit longer than using a purely swing style, results in a better risk to reward.
  • Capturing shorter trends.
  • You will have more trades than a trend follower, and fewer trades than a swing trader.

What is Discretionary Trading

Unlike mechanical trading, which uses rules to initiate trades, discretionary trading is based on the judgment of the trader. Discretionary trader uses their experience and intuition to make trading decisions.

The main drawback of discretionary trading is the effect of emotions on a trader’s decision. However, intelligent traders would be able to develop objective methods to minimize this negative effect.

Strategy Overview

  • Strategy style: Discretionary swing trend following strategy.
  • Trading direction: Only in the direction of the identified trend.
  • Time horizon: Short to medium term (Daily and 4-hour charts). Trades can last from one day to several weeks.
  • Recommended period: 4-hour chart and above.
  • Trend identification method: Trend structure identification
  • Analysis tools: Reversal candlestick patterns, Horizontal support and resistance, Trend Lines, 200 and 50 days Simple moving averages, price action patterns, Fibonacci retracements & extensions, 9-period Relative Strength Index(RSI), 14-period Average True Range.
  • Breakout filter: Closing price.
  • Target 1: 10 pips from the next major support or resistance.
  • Target 2: Dynamic. whatever happens first from the following:
    – If bearish signals outweigh bullish signals. Based on my signal weight classification criteria(which I will explain shortly).
    – At a 5:1 risk-reward ratio.
  • Stop loss: 0.5 the value of 14-period ATR below the nearest support or resistance (ATR explanation).
  • Minimum average R/R for first target: 2 to 1 ( If the first target does not satisfy this RR, we will discard the trade).

Signals Weight Classification

Giving different weights to technical signals will help you make better decisions. For instance, when you face two opposing technical signals, like a bearish overbought signal on RSI, and a bullish major candlestick pattern, you shouldn’t give both signals the same weight. The bullish hammer beats the bearish RSI.

Here is my classification of the technical signals:

Major signals:

  • Trend direction.
  • Chart patterns.
  • Horizontal support in an uptrend.
  • Horizontal resistance in a downtrend.
  • Horizontal support and resistance breakout
  • Long-term moving averages as a support and resistance or moving averages crossover

Medium signals:

  • Candlestick patterns.
  • Horizontal support in a downtrend.
  • Horizontal resistance in an uptrend.
  • Dynamic support and resistance(trend lines).
  • 38.2, 50, and 61.8 percent Fibonacci retracement levels as support and resistance.
  • 1.271, 1.618, and 2.00 Fibonacci extension levels as support and resistance.
  • Momentum signals in the direction of the trend.
    Such as overbought and oversold, bullish and bearish divergence. Momentum patterns and support/resistance break(momentum explained).

Minor signals:

  • Trend line break.
  • Small candlestick patterns.
  • 23.6 and 78.6 percent Fibonacci retracement levels as support and resistance.
  • Momentum signals against the direction of the trend.
    Such as bullish and bearish divergence. Momentum patterns and support/resistance.

Completely ignore signals:

  • Momentum overbought signals in an uptrend and oversold signals in a downtrend.

Every 2 minor signals equate to one intermediate signal.
Every 2 intermediate signals equate to one major signal.
Every 4 minor signals equate to one major signal.

Chart Preparation

Step 1: Apply on the daily chart: 200 and 50 days simple moving averages.

Apply on daily chart: 200 and 50 days simple moving averages. - Trend Following Strategy

Step 2: Identify the main swing highs and lows to identify the current trend structure.

Identify the mains swing highs and lows

Step 3: Identity and recent or present patterns.
In this case, we had a gap. If below the price, the gap is a possible support level.

Identify and recent or present patterns. Trend Following Strategy

Step 4: Draw the Fibonacci retracement from the latest swing low to the latest high.

Step 6: Draw trend lines. Connect lows to draw the lower trend lines. And connect the highs to draw the upper trend line.

 Draw trend lines.-  forex Trend Following Strategy

Step 7: Add 14-period ATR and 9-period RSI. Draw RSI trend lines and support or resistance levels if any. (RSI explanation)

Add 14-period ATR and 9-period RSI

Step 8: Identify candlestick patterns.

Identify candlestick patterns. Trend Following Strategy

Assessing the Technical Position

Major bullish signals:

  • The price is in an uptrend (higher highs and higher lows).
  • The price broke out above the latest swing high
  • The price broke the 200-day SMA.

Intermediate bullish signals:

  • A shooting star candlestick high was broken to the upside signaling trend continuation.
  • The price formed a gap on the breakout.

Major bearish signals: None

Intermediate bearish signals:

  • The price formed a hanging man candle following the breakout
  • The price is just below the dynamic resistance at the upper trend line.

A big win for the bullish scenario.

Bias: Bullish awaiting final confirmation.

Awaiting the Final Confirmation

Let’s progress with the price action. We pressed the forward button to see how the price progresses. And what we had was:

multiple breakout - forex trend following strategy
  • A bullish engulfing candle that broke the recent high and the upper trend line resistance.
  • Broke the dragonfly Doji high. And this is a bullish continuation signal as we explained in the reversal candlestick patterns tutorial.
  • RSI has also bounced off its rising trend line.
  • And most importantly, all that happened in the context of an uptrend.

Add to that, the bullish breakout negated two intermediate bearish signals. As it broke the upper trend line and the hanging man high.

Bias: Bullish confirmed.

Initiating the Trend Following Trade

The trade: We decided to initiate a buy limit order just at the broken high price of 1.0945.

  • To find the next possible targets, we zoomed out to identify the next potential resistance levels (swing highs). The nearest resistance was at 1.1300.
finding next resistance
  • Therefore, we set our first target 10 pips below that resistance at 1.1290.
  • The nearest support was at 1.0821. ATR reading was 75 pips. Therefore, our stop loss should be 37 pips below 1.0821 support at 1.0784. A perfect stop loss as it’s below the 200-days SMA and inside the gap. Both can form support for any decline.
  • The resulting RR was 2.14, above our minimum requirement of 2. The trade is valid and placed.
  • We set the second target at 5:1 risk-reward. The resulting price was at 1.1750, just above a long-term potential resistance level of 1.1714. Therefore we adjusted the stop to 1.1700.
initiating the trade- Swing Trade Forex

Fast-forwarding: The price triggered our entry.

entry triggered

Fast-forwarding: ops, bearish engulfing candle the next day, and RSI breaks its trend line. However, after assessing the overall positives vs the negatives, the bias remains positive.

bearish engulfing candle

Reviewing the Technical Position

Major bullish signals:

  • In Uptrend
  • Still above horizontal support.
  • Above 200 days SMA.
  • A recent bullish breakout above resistance.

Intermediate bullish signals: None.

Minor bullish signals:

  • A bullish breakout above rising upper trend line resistance.

Major bearish signals: None

Intermediate bearish signals:

  • Bearish engulfing candlestick pattern.

Minor bearish signals:

  • Bearish divergence on RSI.
  • RSI breaks its trend line.

The bullish signals still significantly outweigh the bearish signals. We hold onto our trend-following long trade.

bullish signals still outweigh the bearish signals

Fast-forwarding: As the price draws another bearish candle. We have now a new swing high that we can draw Fibonacci retracement on.

fibonacci retracement adjustment - Forex Trend Following Strategy

We drew Fibonacci retracement starting from the latest main swing low for the up wave, to the latest swing high.

Fast forward: Moving two days in time, we noticed the price has drawn multiple slightly long-legged Doji candles at the 38.2% Fibonacci retracement level. That indicates a slowdown in the selling speed and more indecision at this possible support.
We are still in red territory, but as long as we are sticking to our trading strategy, we shouldn’t care if we get stopped out.

doji candles

Fast-forwarding: Some relief, as the price rebounds strongly breaking both Dojis’ highs and forming a bullish engulfing candle.

doji breakout

Fast-forwarding: The price extended to the upside, and reached very close to our target. Then it entered a pullback without showing any major bearish reversal signs. On the contrary, the price formed a bullish hammer. (Learn more about spotting trend reversal in Forex)

bullish bias still intact

Fast-forwarding: Finally, the price touched our first target. Then was rejected, forming a shooting star candle. However, as we explained in our candlestick patterns tutorial, what’s more, important is the trend that led to the candlestick pattern, not the pattern itself. In this case, the pattern forms within a sideways range, with no clear up or down wave leading to it.

Note: we removed the second trade box for now for chart clarity.

first target reached- Swing Trade Forex

Reviewing the Technical Position

pullback to trend line

Fast forwards: We updated our chart for the latest price action. Outlined the latest swing low as support(hammer low). And adjusted the Fibonacci retracement tool to the latest high. And drew a new rising trend line.

Major positives:

  • The trend remains up as the latest swing low (support) is still intact.
  • 50-day simple moving average crossed above the 200-days SMA.

Intermediate bullish:

  • RSI is getting closer to oversold.
  • Testing short-term rising trend line support.

Minor Bullish:

  • The price is at the 23.6 percent retracement.

Major Bearish: None.

Intermediate bearish:

  • Testing horizontal resistance.
  • Bearish shooting star candlestick pattern.

The bullish signals still significantly outweigh the bearish signals.

The price is approaching that support and the 23.6 percent retracement. Meanwhile, RSI is getting closer to oversold. We already know from the technical analysis basics tutorial that RSI overbought or near overbought signals when in an uptrend is a bullish signal. Therefore, we will monitor the price action on the daily and even on the lower time four-hour chart for a bullish confirmation signal to add to our long trade.

bounce of trend line

Awaiting the Final Confirmation

Fast-forwarding: We had a small up candle on the daily chart above. But not enough to confirm a new trade. Let’s look at the four-hour chart.

four-hour chart bullish divergence

The price has broken a very short-term support level at 1.1166, before testing the main daily rising trend. A hammer candlestick pattern formed at the trend line, and the price rebounded to form a bullish engulfing, and settle back above 1.1166. Also, RSI is showing bullish divergence and touched the overbought area.

A long trade is confirmed on the four-hour chart, but not the daily. That’s why we will only have one target. At the main resistance near the recent highs around 1.1300.

Initiating the Trend Following Trade

The trade: We decided to initiate a buy limit order just at 1.1166 level.

Stop loss = nearest support level – 0.5 (14-period ATR)

The nearest support is the low of the hammer at the rising trend line, however, another horizontal support at 1.1109 is very close. In such a case, the stop should be put below the more major support that if broken will negate the whole idea behind the trade In this particular case 1.1109 is the more major support. The difference between the two support levels will be deducted from the distance we measure through the ATR.

ATR value was 28 pips.

The difference between support levels= 1.1132 – 1.1109= 23 pips.

Value of ATR – the difference between support levels = 5 pips.

So stop loss will be 1.1109- half the value of ATR = 1.1109-2.5= round it to 1.1106.

However, because another key support is very close, we extended our stop to be below that support.

Finally, we will target the resistance at 1.1290, 10 pips below the next main resistance.

trade initiated at support trend trading strategy

Fast-forwarding: Price dropped to trigger our trade.

trade entry triggered- Forex Trend trading Strategy

Fast-forwarding: The price dropped close to our stop but bounced back higher. We noticed a bullish falling wedge pattern complete. Which is a positive signal for our trade.

falling wedge breakout on four-hour

Reviewing the Technical Position

Looking back at the bigger picture on the daily chart. The rising trend line was broken. But according to our signal weight classification, a trend line break is a minor signal.

trade remains valid

The positives still outweigh the negatives, and the trad remains valid.

The positive still outweigh the negatives -forex swing trading

Fast-forwarding: Boom, strong rally, and target hit.

strong rally and target hit. - trend folowing strategy

Fast-forwarding: Going back to the daily chart, the price extended the up move before pulling back towards the broken resistance, which may turn support now. Indeed the price formed long-legged Doji.

long legged doji

Initiating an Additional Trend Following Trade

In this case, we wanted to place a long trade. We always use the nearest support for our limit order. In this particular case, the nearest support is a long-legged Doji candle. In such a case, we place our order 10 pips above the low of the candle.

So it’s going to be at 1.1322, as the low of the candle at 1.1312.

As both the low of the candle and the next horizontal support are very near. We will use the same method we used in the prior trade. We will place the stop loss below the main support at 1.1300. But deduct the difference between the two support levels from the ATR value.

ATR = 69.

The difference between the low of the candle and the support level is 12 pips. so the new ATR will be 69 – 12 = 57 pips.

0.5×57= 26 pips.

Our stop will be at 1.1300-26 = 1.1274

Our first target would be 10 pips below the next main potential resistance level, which is at the most recent swing high at 1.1445. So Stop = 1.1335.

The resulting RR for the first target is 2.35. Accepted.

new trade placed

Fast-forwarding: The price rallied and reached the first target without triggering our buy limit order. In such a case, the trade is no longer valid and we cancel it.

trade cancelled

Let’s get back to our active trade now. The technical position remains unchanged. As there are no new bearish signals.

main trade remains valid

Fast-forwarding: The price has extended the bullish trend, and reached our full target without showing any serious bearish signals.

trade target reached

Let’s try to find a new signal. We updated the chart with the most recent price action. Drew a rising trend line. And identified the latest swing highs and lows.

update chart- Swing Trade Forex

Fast-forwarding: We moved in time until we saw this hammer candle. Which confirmed a new long trade.

hammer candle

The trade: buy limit at the nearest support. But since the hammer candle low is the support at 1.1689. We placed our entry limit order 10 pips above the hammer low. At 1.1699.

ATR reading was nearly 90 pips. So we placed our stop 45 pips below the low of the hammer at 1.1654.

First target 10 pips below next swing high resistance at 1.1900.

The resulting RR is 4.47. In this case, where should we place the second target, as we use 5:1 risk reward for it. so it will be very close to the first target.

If the value of RR for the first target is more than 2.5. Double it for the second target.

The second target RR should be 4.47×2 = approximately 9.

The second target will be at 1.2105.

Fast-forwarding: The price moved higher the next couple of sessions before reversing and triggering our buy entry.

trade entry triggered

Fast-forwarding: Later on the price reached the first target.

first target reached

Note that the price is approaching a major long-term potential resistance level.

long term resistance

Fast-forwarding: The price hit that resistance and formed a major gravestone Doji candle.

gravestone doji at resistance

Reviewing the Technical Position

We have to review the technical position as the price presented new bearish signals.

Major positives:

  • The trend remains up as the latest swing low (support) is still intact.

Intermediate bullish: None.

Minor Bullish: None

Major Bearish: None.

Intermediate bearish:

  • Testing horizontal resistance.
  • Bearish Dragonfly candlestick pattern.

Minor Bearish:

  • RSI showing bearish divergence

One major bullish signal versus two intermediate and one minor bearish signal. As every two intermediate equates to one major signal, what remains is a bearish minor signal.

Therefore, we decided to close the remaining of our position at market price. Which is still above the first target.


I end the journey here and hope you enjoyed it. My main goal was to help you form your own framework and have your trend-following strategy.

Of-course market conditions will result in profitable and losing trades. It was a coincidence that period provided a few winners. However, as long as you keep your approach unified and practice good money management, you should end up doing fine.

I am looking for your opinion and whether you are a fan of trend following or not. If yes, it would be nice if you kindly share your thoughts about trend-following in the comments section.


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Lu'ay Af.
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Lu'ay Af.
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